Consider a country with the national income of $32 billion, the amount of taxes paid by households of $12 billion, and household consumption of $16 billion

Economics Dec 18, 2020

Consider a country with the national income of $32 billion, the amount of taxes paid by households of $12 billion, and household consumption of $16 billion. Suppose now that country's national income increases to $35 billion. Assuming the amount paid in taxes is fixed at $12 billion and MPC = 0.7, what will be the new household consumption?

Expert Solution

Household consumption = marginal propensity to consume x disposable income. The new disposable income is 35 - 12 = $23 billion, so the new household consumption is 0.7*23 = $16.1 billion.

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